Question

$29.25 DO Cost of Equity gl bn bi b an + b 3 b $2.00 | 15.00% 10.00% 10.00% 10.00% 10.00% D4 10.00% 10.00% 10.00% 10.00% D8 10.00% 10.00% D10 5.00% P10 D5 b D6 $2.20 $2.42 $2.66 $2.93 $3.22 $3.54 $3.90 $4.29 $4.72 $5.19 $54.47 87 g8 89 D9 810

2) What is the value today of KTS stock if it grows at 12% for 5 years, then 8% for 5 years, and then grows at 5% thereafter?

Answer 1

	Required rate=	15.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	2	12.00%	2.24		2.24	1.15	1.9478
2	2.24	12.00%	2.5088		2.5088	1.3225	1.89701
3	2.5088	12.00%	2.809856		2.809856	1.520875	1.84753
4	2.809856	12.00%	3.14703872		3.14703872	1.74900625	1.79933
5	3.14703872	12.00%	3.524683366		3.524683366	2.011357188	1.75239
6	3.524683366	8.00%	3.806658036		3.806658036	2.313060766	1.65
7	3.806658036	8.00%	4.111190679		4.111190679	2.660019881	1.54555
8	4.111190679	8.00%	4.440085933		4.440085933	3.059022863	1.45147
9	4.440085933	8.00%	4.795292807		4.795292807	3.517876292	1.36312
10	4.795292807	8.00%	5.178916232	54.379	59.55791623	4.045557736	14.72181
	Long term growth rate (given)=	5.00%			Value of Stock =	Sum of discounted value =	29.97
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 10 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor